Efficient Markets and Market Regulation
Verena Ross, Director of Strategy and Risk, FSA
As covered previously, the Turner Review spends a bit of time examining some of the ideas that have underpinned regulation and how this affects what it does. The message seemed to be a pretty clear a shift away from the EMH and relying on market discipline, so this session could be really interesting. I'm not going, but on the unlikely off chance that anyone reading this is, if you could let me know what the thrust of the presentation was I'd be very grateful (presumably it might appear on the FSA website).
And on the same thought, here's a short snippet from Asset Price Bubbles: The Implications for Monetary, Regulatory and International Policies which makes the point about why this matters:
The rational behaviour paradigms… imply a restrained role for policymakers. Regulations that interfere with investors’ pursuit of profit opportunities or the flow of information will be detrimental to financial market efficiency. In those models where frictions are identified… enlightened public policies will attempt to eliminate those frictions by removing restrictions on trading (e.g. lock-ups) and financial innovations. Behavioural finance models… have substantially different implications. Regulations should be tightened on self-directed retirement plans and the access that “unsophisticated” investors have to sophisticated and risky financial products. Transaction taxes effected to retard speculation would be a radical intervention… [T]ighter regulations on accounting and advertising and greater penalties for false reporting would seem warranted.